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The package arrived at Cindy Lohman’s home in Great Mills, Maryland, just two weeks after she learned that her son, Ryan, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was a thick, 9-inch-by- 12-inch envelope from Prudential Financial Inc., which handles life insurance for the Department of Veterans Affairs.

Inside was a letter from Prudential about Ryan’s $400,000 policy. And there was something else, which looked like a checkbook. The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit.

“You can hold the money in the account for safekeeping for as long as you like,” the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue.

Lohman, 52, left the money untouched for six months after her son’s August 2008 death.

“It’s like you’re paying me off because my child was killed,” she says. “It was a consolation prize that I didn’t want.”

As time went on, she says, she tried to use one of the “checks” to buy a bed, and the salesman rejected it. That happened again this year, she says, when she went to a Target store to purchase a camera on Armed Forces Day, May 15.

‘I’m Shocked’

Lohman, a public health nurse who helps special-needs children, says she had always believed that her son’s life insurance funds were in a bank insured by the FDIC. That money -- like $28 billion in 1 million death-benefit accounts managed by insurers -- wasn’t actually sitting in a bank.

It was being held in Prudential’s general corporate account, earning investment income for the insurer. Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings.

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Gerry Goldsholle, the man who invented retained-asset accounts, says MetLife makes $100 million to $300 million a year from investment returns on the death benefits it holds. A former president of MetLife Marketing Corp., Goldsholle, 69, devised the accounts in 1984. He’s now a lawyer in private practice in Sausalito, California.

‘This Is Crazy’

Goldsholle says he pondered the billions of dollars of death-benefit proceeds the company paid out each year.

“I looked at this and said this is crazy,” says Goldsholle, who left the firm in 1991. “What are we doing to retain some of this money? It’s very expensive to bring money in the front door of an insurance company. You’re paying very large commissions and sales expenses.”

So he came up with a way for MetLife to hold onto death benefits.

“The company would win because we would make a nice spread on the money,” Goldsholle says, while customers would earn interest on their accounts. MetLife, he says, can earn 1 to 3 percentage points more from its investment income -- mostly from bonds -- than it pays out to survivors.

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Prudential’s VA policies promise either a lump sum payout or 36 monthly payments. About 90 percent of survivors, including Lohman, choose to receive the full amount upfront. When they do, they don’t get a check; they get a “checkbook.”

Under a 2008 law, survivors covered by Prudential’s VA policy are allowed one year to put death benefits into a Roth IRA, allowing them to earn investment gains for the rest of their lives tax-free. Prudential never informed Lohman, she says.

‘If They Had Told Me’

“I definitely would have done that if they had told me,” Lohman says.

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Back at the Veterans Affairs office, Deputy Assistant Director Wurtz, who’s a civilian employee, says he now understands for the first time that since he’s covered by the federal insurance program, his own wife could receive a MetLife “checkbook” someday.

‘Ripping Off Their Own’

“Uncle Sam is ripping off their own,” Wurtz says. “My wife would get the money, and they would blood-suck some of it out of her.”

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